Agency Costs of Overvalued Equity and Earnings Management in Companies Listed on WSE

Abstract

ARTICLES Agency costs of overvalued equity and earnings management in companies listed on WSE (Michał Kałdoński, Tomasz Jewartowski) Friends or foes? Activist hedge funds and other institutional investors (Andrew Carrothers) Board ethos and institutional work: developing a corporate governance identity through developing the uk code (Donald Nordberg)Governance and fi nancing of innovative very small business (VSB): evidence from a Canadian biotechnological fi rm (Alidou Ouedraogo) Corporate governance, risk and crises in small companies: shedding light from inside the boardroom black box (Leslie Spiers) Gender diversity impact on corporate social responsibility (CSR) and Greenhouse Gas emissions in the UK (Renata Konadu)Lessons university-based business schools should learn vicariously-rather than through experience-from university athletics (Edward W. Miles) Commercialization of the education of economists versus integrity of the university (Jan Szambelańczyk) Abstract: Th e aim of the paper is to study earnings management activities of companies listed on Warsaw Stock Exchange from the perspective of Jensen's agency theory of overvalued equity (Jensen, 2005). Specifi cally, we analyze relations between equity overvaluation and various types of earnings management used by public companies between 2005 and 2015. We provide evidence partially consistent with Jensen's theory. Specifi cally, our study reveals that overvaluation intensifi es income-increasing accrual earnings management activities. However, we also fi nd that overvaluation is not followed by real transactions management activities, as opposed to previous studies based on the US market. We provide some evidence that this diff erence might be driven by external monitoring executed by large institutional investors.

Institutional investors and real earnings management: A meta-analysis

“…In case of other regions (Europe & Central Asia, South Asia and international sample) significantly higher mean effect sizes can be observed which indicate that the mitigating effect of institutional shareholders in these regions is weaker when compared with North America. This could be explained by the short-term approach of transient institutional shareholders aiming to meet or exceed short-term targets which could empower earnings' manipulation (Kałdoński & Jewartowski, 2017). The potential explanation for the higher mitigating effect in North America and East Asia & Pacific countries can be summarized in three points:…”

A disequilibrium mechanism: When managerial decisions cause macroeconomic instability

“…Unfortunately, managers are usually assumed to maximize their personal income and the tacit factors are excluded from analysis. It is a realistic assumption that CEOs are also motivated by the tacit, nonmaterial factors (Kornai, 1992;Harris & Helfat, 1997;Ugboro & Obeng, 2000;Mihályi, 2017;Kałdoński & Jewartowski, 2017).…”

Accrual-based earnings management and organizational life cycles: Two-dimensional analysis

“…The issues concerning the prerequisites of accrual-based earnings management (AEM) have been an area of interest since at least the 1950s (Erickson et al, 2006). Prevailing motives for the implementation of the AEM phenomenon identified in the literature are based on mutually interpenetrating and complementary theories, such as the agency theory (Jiraporn et al, 2008;Kałdoński & Jewartowski, 2017;Raoli, 2013;), the contract theory (Holthausen et al, 1995), the signalling theory (Fields et al, 2001;Smith & Pennathur, 2019), the institutional theory of the business enterprise (Jo, 2019;Stolovy & Breton, 2004;) or the threshold management theory (Degeorge et al, 1999;Wang et al, 2017). Most of them emphasize that the efforts of the management to meet the expectations of particular groups…”